April 16 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed the Long-Term Foreign Currency Issuer Default Rating (LT FC IDR) of India-based Tata Steel Limited’s (TSL) at ‘BB+. The agency has also affirmed Tata Steel UK Holdings Limited (TSUKH) LT FC IDR at ‘B+'. The Outlook remains Negative. The agency has also assigned TSL a senior unsecured rating of ‘BB+’ A full list of rating actions is provided at the end of this commentary.

Key Rating Drivers:

Profitability Pressure: The negative outlook continues to reflect Fitch’s expectations of likely pressure on TSL’s profitability at its Indian and European operations. The company’s performance was weak in the 9 months of FY13 with EBITDA margin falling to 8% (9mFY12- 9%) reflecting the challenging economic conditions. Profitability at TSL’s Indian operations fell to 28.5% (9mFY12 - 34.8%), while TSUKH recorded EBITDA losses during two quarters. The pressure on profitability is likely to result in TSL’s net leverage deteriorating to around the 5x level, above Fitch’s negative guideline of 4x for FY13.

Expanded Indian Operations: Fitch expects TSL’s leverage to improve back to 4x levels by FY14 and below 4x levels thereafter, supported by increasing volumes at its expanded Indian operations. Volumes at TSL’s Indian operations grew to 7.5 metric tonnes per annum (mtpa) during FY13 (FY12 - 6.6 mtpa) driven by volumes from the additional 2.9 mtpa of capacity which came on line during Q2FY13. Fitch expects the stable growth in volumes to result in EBITDA growth over the medium term, with a larger proportion of additional volume likely to be in value added products. However, any significant fall in steel prices may impact the company’s financial profile negatively.

De-leveraging Plans: TSL plans to reduce its debt levels in FY14. This is reflected in TSL’s (through its subsidiary) sale of investments amounting to INR9.8bn in March 2013. Fitch believes that the company is likely to divest additional assets to deleverage. However, the agency notes that any non-reduction in debt levels may impact the ratings negatively.

Tata Group Support: TSL’s ratings continue to benefit from a one-notch uplift on account of the potential support from the Tata group due to the former’s strategic importance to the group. Any weakening of linkages between the group and TSL, and/or the group’s inability to provide support would likely affect the ratings negatively. Fitch takes a consolidated view of TSL - with TSUKH’s rating benefiting from potential parental support in line with its Parent and Subsidiary Rating Linkage methodology.

Strong Liquidity: The ratings benefit from TSL’s strong liquidity with consolidated cash and bank balances of USD1.26bn and access to undrawn lines of USD1.12bn as at end-December 2012.